Written by Eamonn McElroy, CPA, Atlanta
Published August 11, 2021
Background
This article is part one of a series. In this series, we’ll examine forms and reports that a US person1 may be required to file if they have assets or financial activity outside the US. Today, we’re examining FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
General Overview
Commonly called the “FBAR” (pronounced “eff-BAR”) by tax practitioners and US expats, the Report of Foreign Bank and Financial Accounts is perhaps the most widely encountered US foreign filing obligation. The FBAR is not a tax return filed with the IRS but rather a report filed with the Financial Crimes Enforcement Network (“FinCEN”). Like the IRS, FinCEN is a bureau of the Treasury Department. However, while FinCEN and the IRS are separate and distinct bureaus, it is important to note that information provided on an FBAR may be shared by FinCEN with the IRS and other government agencies.
Generally, an FBAR must be filed by a US person if the aggregate maximum value of all foreign financial accounts that the US person has a financial interest in and/or signature authority over during the calendar year exceeds 10,000 USD. Many US expats and US resident aliens file FBARs each year due to these relatively low filing thresholds.
Okay, I need to file an FBAR. What do I need to disclose?
A properly filed FBAR discloses all foreign financial accounts that the filer has a financial interest in and/or signature authority over during the calendar year. The balances of the foreign financial accounts are reported on the FBAR in USD equivalent by translating the foreign currency to USD.
What is considered a “foreign financial account” for FBAR purposes is not always intuitive. One of the most common mistakes made by filers that self-prepare FBARs or practitioners that prepare FBARs and have limited experience is that they fail to consider all foreign assets and activity that would generally fall into the FBAR “foreign financial account” definition. To illustrate just a few examples, the following accounts would generally be considered a foreign financial account for FBAR purposes under current guidance:
- A foreign pension or retirement account with a cash value.
- A foreign insurance policy with a cash value.
- An escrow account maintained by a foreign attorney that temporarily holds the sales proceeds of foreign real estate.
- A virtual currency wallet if the virtual currency wallet is maintained on a server that is physically located in a foreign country.
- A safe deposit box located in a foreign country IF the financial institution has authority to open the box and manage the assets therein.
Due to the nature of the FBAR and the penalties associated with failure to file a complete report, it is generally advisable to abide by the “when in doubt, report” mantra for any accounts that fall into the gray area of what may be considered a foreign financial account.
Help! I have not been filing an FBAR – OR – my FBAR has been prepared improperly. What should I do?
US foreign filing obligations are very complex. Furthermore, the penalties for even non-willful failure to file many US foreign filing obligations are very high. After learning of your failure to file or improperly prepared FBAR, you should immediately reach out to a firm that has experience filing these obligations and experience keeping filers compliant on an ongoing basis. As you will learn throughout this series, the FBAR is just one of many forms and reports that US individuals and US entities may have exposure to.
1Generally, a “US person” for FBAR purposes includes an individual who is a United States citizen or United States resident, an entity created or organized in the United States or under the laws of the United States, or a trust or estate formed under the laws of the United States. Note that the “United States”, for FBAR purposes, includes the 50 United States, the District of Columbia, United States territories (e.g. American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the US Virgin Islands), and Indian lands as defined in the Indian Gaming Regulatory Act.
Copyright © 2021 Eamonn McElroy CPA, LLC.
Disclaimer: Tax law, regulation and procedure are constantly changing. Eamonn McElroy CPA, LLC has provided this article as general information only and is under no obligation to update the article for future changes, including but not limited to changes in tax law or procedure. The information contained in the article is not tax, investment or legal advice, nor should it be construed as tax, investment or legal advice. You should consult with your advisors to determine how the information in this article affects you and what actions you may take and should take.